“Merlyin” – A Ship That Neither Sinks Nor Reaches It’s Shore
CA Prarthana Jalan
The author expresses dismay over the fact that though a Special Bench was constituted to resolve an important controversy, the controversy is far from over. Worse, there appears to be no quick resolution in sight in view of the conflicting High Court judgements on the issue. She pleads for the adoption of a quick dispute resolution process to deal with such issues
We are all aware of the voyage of Merlyin Ship (M/s. Merilyn Shipping & Transports vs. ACIT (ITAT Visakhapatnam Special Bench)- who is sailing in “the sea” of applicability of provision of sec 40 a(ia) of the I.T ACT, 1961 on paid or payable.
Sec 40a(ia) of the I.T Act, 1961 states that if TDS is not deducted, as applicable on the expenses claimed by the assessee then the benefit of deduction of the expenses for computation of the income from business & profession will not be allowed.
The text of sec 40a(ia) is as under-
whenever controversy arises about an interpretation of the ambiguity of law then why don’t we have a system wherein reputed/leaned representatives of law/legal fraternity/judicial members can sit together and reach a specific consensus? Why don’t we have a mechanism wherein instead of going through the litigation process individually, wasting time, energy & money of all the parties involved, an interpretation can be done collectively?
(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139
The whole controversy is evolving around the word payable used in the aforesaid section. There are plethora of decisions both in favour and against the interpretation that the amount would be disallowed only if it is “payable” and not paid. Which school of thought is correct is a different scenario. But the whole voyage do raises questions which require introspection in our prevalent system of taxation and judicial working.
The most hot cake case on the issue is that of M/s. Merilyn Shipping & Transports vs. ACIT (ITAT Visakhapatnam Special Bench). A decision which every tax practitioner/judicial member might be knowing. In the case (supra)The Judicial Member was of the view that the disallowance u/s sec 40a(ia) would be applicable only on the amount payable and the accountant member was of the view that it would be attracted also on the expenses paid. Therefore a special bench was constituted and finally the third member also had the same view that the expenses would be disallowed only if there are payable. But the matter did not rest there and many ice-burgs came in form of various judicial pronouncements which were against the said decision , the most prominent being of the Hon’ble Calcutta High Court in CIT vs. Crescent Export Syndicate. Since, then various different tides are coming in the sea some wiping off Merlyin and some Crescent. The order of the Special Bench has since been put under interim suspension by the Andhra Pradesh High Court.
The CBDT has issued Circular No: 10/DV/2013 dated 16/12/2013 giving the ‘Departmental View‘ on the controversial issue upon the applicability of section 40(a)(ia) of the Income-tax Act, 1961 on the word “paid” or “payable” and has stated that sec 40a(ia) will include the expenses paid within its ambit but in areas where jurisdictional High Court has taken a different view then the law as laid by the concerned jurisdictional High Court will be prevalent. The relevant excerpt of the circular is as under:-
“4. After careful examination of the issue, the Board is of the considered view that the provision of section 40(a) (ia) of the Act would cover not only the amounts which arc payable as on 31st March of a previous year but also amounts which are payable at any time during the year. The statutory provisions are amply clear and in the context of section 40(a) (ia) of the Act the term ‘payable’ would include ‘amounts which are paid during the previous year”.
5. Where any High Court decides an issue contrary to the ‘Departmental View’, the `Departmental View’ thereon shall not be operative in the area falling in the jurisdiction of the relevant High Court. However, the CCIT concerned should immediately bring the judgement to the notice of the CTC. The CTC shall examine the said judgement on priority to decide as to whether filing of SLP to the Supreme Court will be adequate response for the time being or some legislative amendment is called for.”
It is also pertinent to mention that Circulars are only binding on the department and not on assessee or on judicial authorities.
Hon’ble Allahabad High Court has in the decision of CIT V/s Vector Shipping accepted the judgment of Merlyin Shipping(supra) and the department SLP has also been dismissed against the same, though it was dismissed on a different ground, by a cryptic order.
The whole voyage of the “ship” brings before us the beneath, the sea elements which are crucial for us to ponder upon:-
First, Income Tax Act is a central act. The provisions of the Income Tax Act, as stated in section 1 of the Act, which reads as under
“(1) This Act may be called the Income-tax Act, 1961.
(2) It extends to the whole of India.
(3) ……….”.
are equally applicable to the whole country. Then How can there be disparity in the applicability of law between the states of the country? How can a person living in one state i.e Uttar Pradesh will bear no disallowance of expenses because he is travelling on Vector shipping and in West Bengal “The Crescent” will hit you, resulting in not only the disallowance of expenses but also initiation of penalty proceedings. The provisions of the law has to be applied equally on all irrespective of the state in which the person resides. Ironically, people in many other states are still standing at the bay in the dark night for their jurisdictional High Court have not acted as the light house on this impugned issue as yet.
Secondly, the Merlyin shipping judgement (supra) is a very erudite verdict. All aspects were thoroughly vetted by the Hon’ble members and when there was a difference in opinion was a special bench constituted. The Hon’ble Vice president had also gone through all the arguments and then had given his verdict. In the other Hon’ble High courts/Tribunals decisions, weather in favour or against not a single different argument has been put across by the counter parts counsel. A special bench is created to resolve issues when there is conflict in the interpretation of the law between the members of the bench. When after due consideration of all the arguments a majority decision has been reached then shouldn’t its over-ruling be also be done by Special/Full High Court Bench? Why then do we have a special bench, if its decision has not to be followed?. Decision of the Special/Full High Court Bench could if still not been acceptable then it can be referred to the Hon’ble Supreme Court.
Thirdly, whenever controversy arises about an interpretation of the ambiguity of law then why don’t we have a system wherein reputed/leaned representatives of law/legal fraternity/judicial members can sit together and reach a specific consensus? Why don’t we have a mechanism wherein instead of going through the litigation process individually, wasting time, energy & money of all the parties involved, an interpretation can be done collectively?
Without my favoring a school of thought or the judgement of Merlyin Shipping (supra) even I am also curiously waiting for the journey of the ship to be ended. A ship which has been sailing in the sea from many years has shown us many under the sea, potholes and ice-berg of the prevalent judicial system which needs cleaning up from all of us.
Let us all wait and watch the fate of the ship that “does it sinks or reaches the shore?”.
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Its not so complicated.
Various Judges at many point of time have said that…… “the judgement given by them, depends upon the pleadings made by the counsels of the parties, at the time of hearing of the respective case.”
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So its always advisable to have a good counsel to represent the case.
Very Informative article and very nicely written. Depicts the true picture of Indian tax administration and harassment caused to tax payers and professionals.
The Ahmedabad Bench of ITAT has, after the dismissal of Departmental SLP, has chosen to follow the Crescent Syndicate decision in the case of Rishti Stockbrokers. We thought that the issue had become final after the dismissal of SLP in the case of Vector Shipping, but like a phoenix, it rises again.
To ADD (more thoughts):
For an interesting article, connecting and pleading for application of • Mimamsa principles of interpretation to resolve a tax case …HERE http://www.thehindubusinessline.com/todays-paper/tp-opinion/mimamsa-principles-of-interpretation-to-resolve-a-tax-case/article1748184.ece
May be, to be blunt, and do some plain and honest speaking, any such pleading, howsoever sensible founded on devout and soulful wisdom, is , in today’s context , most likely to turn out to be a ‘far cry’; more aptly, a ‘voice crying in the wilderness’. AT the bottom of it all, lies the reality that there is/has always been a cavernous gap between what is ‘ideal’ and what is ‘practical’ verging on the dependence in so-called idea of ‘balance of convenience’ (e.g. marriage X marriage of convenience ), so on.
You be the judge- is there any scope for a turn around and reappraisal /reversal any longer , of the ‘wisdom’ (want of it) in / behind the thinking of we, the modern sapiens in the violently changed scenario prevailing all around.
OFFHAND
In idescribing the glorious nature of the law as ‘ambulatory’ , what the learned member of the legal fraternity has presumably alluded to is the impermanent nature of the law in olden days; and according to different schools of thoughts, with the then obtaining varying principles of interpretation, wprt the Hindu law.
To attempt and dilate but with a different stroke: Those were the laws /principles handed down , rather passed on, from generation to generation, over the centuries/decades, with no external limiting/restraining factors, notwithstanding that the laws, especially so called ‘personal’ laws, were , in content, far far simple, in comparison to today’s context. In the matter of interpretation of modern day laws / enactments, of varying kinds, – in the context herein, it is the taxation law which is of relevance- as one can readily find from any leading text book, with expert commentary and related citations, there have been quite / overwhelming large number of rules and principles enunciated by courts , to serve as useful aids; but mostly because of the enormity of them, often mutually conflicting, it has always been an arduous task/exercise for both the lawyers and judges to apprise and decide as to which one or more of those aids could be considered as appropriate , and to be applied. As often highlighted by me if when called for /occasion arose, the principle of interpretation that has been increasingly gaining currency, and often being called to aid/invoked , is what is cryptically known as, “UPDATING CONSTRUCTION” . Being obliged to give more and more thoughts, one is left with an irresistible/gut feeling that , because of its virtually all-embracing amplitude, in course of time that is the principle which might happen to hold the field as the most leading aid, for judiciary’s purpose of ‘construction’ of any enactment.
May be worth knowing, should there be more but differing thoughts on the foregoing personal observations of general interest.
My senior always quotes his professor’s words to the effect: That glorious nature of the law is that it is ambulatory.
I can give example
“Application of Mimansa principles sometimes lead to different results. For example, there is a text of Vasishta which says “a woman should not give or take a son in adoption except with the assent of her husband”. This has been interpreted in 4 different ways by our commentators. (1) The Dattak Mimansa holds that no widow can adopt a son because the assent required is assent at the time of adoption, and the husband being dead no assent of his can be had at the time of adoption. Vachaspati, of the Mithila School of Mitakshara, is of the same opinion, but for a different reason. According to him, adoption can only be resorted to after performing the homa, and since a woman cannot perform the homa with Vedic mantras, she cannot adopt. (2) The Dayabhaga view is that the husband’s assent is not required at the time of actual adoption, and hence if the husband had given assent in his lifetime his widow can adopt after his death. (3) The view of the Dravida School of Mitakshara is that the words “except with the assent of the husband” are only illustrative, and hence assent of her husband’s agnates or father-in-law’s agnates is sufficient. (4) The Vyavaharmayukha and Nirnayasindhu hold that assent is required only for the woman whose husband is living and hence a widow can freely adopt unless she had been expressly forbidden by her late husband”
Extract from Article The Mimansa Principles of Interpretation
by Justice Markandey Katju*
Cite as : (1993) 1 SCC (Jour) 16
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Supreme Court has the power to initiate suo motu proceedings. This is the fittest of fit case. There should be a policy for contradictory High Court orders. I liked the quote of Prarthana ” Let us all wait and watch the fate of the ship that “does it sinks or reaches the shore? We usually have to wait for that which is worth waiting for. It’s a superb article. I thoroughly enjoyed.Thanks
Awesome Article , beautifully presented.
Rider: On the referred sec 36 (1)(iii), it might be worthwhile to look into the earlier proposed amendment as in the Finance Bill 2015, and the since changed version for enactment.
OFFHAND
In a lighter vein: Not at all surprising that the member of the CA fraternity strongly feels to have been left at bay; and with the cited ship (s) in the mid ocean , seemingly with no hopes of ever sighting or reaching the shores in the foreseeable future.
Now coming to the serious part of the story narrated, the alluded particular enactment giving rise to the issue and struggling for long to be settled finally,- on the first blush, seems to be more or less a similar issue but under a different section, on which the SC has rendered its verdict not long before. Anyone really itching for more info. , and if acutely interested or concerned, may care to readily look up the report HERE: Taparia Tools Ltd vs. JCIT (Supreme Court); also, the shared viewpoints vide the comments thereon.
For better understanding and enlightenment, however, recommend to go through the Palkhivala’s text book commentary and case law cited , on section 36(1)(iii), besides on sec 40 (a)(ia).
In a manner of viewing, the present write-up has touched nothing more than the proverbial ‘tip of the ice berg’; to know why to say so, – look up HERE ” New database of High Courts unearths a 57-year-old case” (BL)
This matter is subjudice before the honble Punjab &Haryana HC and I also hope that the ship sails to complete the journey and at least bring an end to the tussle between department and taxpayer
Whenever such decisions come, especially by Special Bench of the ITAT, it is advisable that the CBDT takes a decision to accept it. Or else, brings in an amendment prospectively, to clarify its position, if it does not accept, so that a lot of time need not be wasted, incurring avoidable expenses on either side. Still worse is the situation when it amends the Act retrospectively after after a decade or so, when majority of the parliament members as also the officials of the CBDT would not be there to clarify their original intention in drafting the provision. Some radical change in the attitude has to come for those piloting a provision instead of leaving a grand son to explain the intention of his grand father, which I say with all respects to all.
Very excellent presentation. Somebody should represent to the present FM, who also is a lawyer, to have suomotu jurisdiction to Supreme court to take up the case where there are differing views between the various states especially in tax cases or on a PIL petition, since public interest is involved in having a definite direction for the interpretation.
The author has highlighted the most crucial points through this article about our present legal system, i.e. applicability of Income-tax Act to whole of India, the relevance of Special Bench/ High Court and about saving the time, cost, energy and resources of our country, cutting off the unnecessary usage of the assessees’ or public resources. Even the Directive Principles of State Policy under the Constitution of India vide Article 39-A requires our legal and judicial system to work on the basis of equal opportunities for all and free or least costly legal aid to all. This can be done by adoption of suitable schemes for the same. The article is really eye-opening and applaudable with revolutionary ideas…
see cochin ITAT decision (nrs ganeshan and poojary) – thomas george muthoot and ors dated 28.8.2014, ITA Nos 63 and 64/coch/2014 – the ramanthalli service cooperative bank – 361/coch/2012 – where they have refused to follow merlyn shipping, vector shipping after analysing all decisions including theekadir press (chennai itat),
Considering the long time that any issue takes to resolve in our country, it is an excellent suggestion of the learned author to have an alternate mechanism for early resolution of such a problem. The assesses are put to great hardship for lack of authoritative interpretation in the interim period leading to multiplicity of litigation. Naturally, all assesses would like to follow the authoritative interpretation to save themselves from penal consequences. I think both CBDT and CBEC should take initiatives in this regard.
The view expressed by the author is excellent and well thought off. This is high time when legislators has to act to save the sanctity of our judicial system. The Central Law should be applicable to all equally. Instead of issuing instruction, Department should have directed all the AOs to follow the judicial view in case of all assessees and then could have necessary amendment in the Act. Author is right in saying that ” Let us all wait and watch the fate of the ship that “does it sinks or reaches the shore?”. “
There is a decision of the Chennai Bench of ITAT in theekathir press where they have considered the contrary views of the Calcutta, Gujarat etc high courts and following vegetable products case in SC allowed the issue favouring the assesse despite the unfavorable judgment’s.
Your article could have highlighted this issue as well
A very engaging article and wonderful presentation of the state of Income Tax administration in India. More often than not solution of government is bad than the problem. Whether the boat sinks or it sails, the pirates would always control it. Is there a retrospective amendment in offing? Well only time could decide.. Kudos!